California Court Denies Summary Judgment on Known Conditions Exclusion

In its recent decision in Lennar Mare Island v. Steadfast Ins. Co., 2014 U.S. Dist. LEXIS 26405 (E.D. Cal. Feb. 28, 2014), the United States District Court for the Eastern District of California had occasion to consider the relationship between a fixed site pollution liability policy and a remediation cost containment policy.

The Lennar decision concerns environmental liabilities at a former Naval base on Mare Island in Vallejo, California.  The site was transferred to the City of Vallejo in 2002.  The City agreed to undertake an environmental remediation of the site that would be funded by the Navy.  The City later transferred the property to Lennar Mare Island, LLC (“LMI”).  LMI, in turn, contracted with CH2M Hill Constructors, Inc. (“CCI”) to perform the required environmental remediation.

Steadfast Insurance Company issued two policies relevant to the site.  First, it issued a Remediation Stop Loss policy to CCI (the “RSL Policy”), providing cost overrun protection with respect to CCI’s remediation efforts.  Second, Steadfast issued an Environmental Liability Insurance policy (the “ELI Policy”) to LMI that insured against cleanup costs resulting from a pollution condition not known to LMI prior to the policy period, but instead first discovered during the policy period. 

The Steadfast policies referenced each other in an effort to ensure that they did not provide overlapping coverage.  Thus, the ELI Policy defined “Known Pollution Conditions” as:

… all conditions specifically described in the Scope of Work Endorsement to the Remediation Stop Loss Policy . . . and which require or  may ultimately require any form of remedial investigation or action . . .

The Scope of Work Endorsement in the RSL Policy, in turn, made reference to the conditions and activities specifically outlined in that policy and certain attachments thereto.  The RSL Policy also contained the term Known Pollution Conditions, which it defined as being limited to the conditions described in the Scope of Work Endorsement requiring any form of remedial investigation or action. 

At issue in the Lennar decision was LMI’s right to insurance coverage for PCB contamination in Building 116 of the site.  The RSL Policy’s Scope of Work Endorsement, and certain attachments thereto, made reference to PCB contamination in concrete floor slabs in Building 116.  The endorsement also referred to PCB contamination in transformer pads in Building 116.  The RSL Policy did not, however, make reference to PCB contamination in the wood floor of Building 116.  Thus, when CCI encountered PCB contamination in the building’s wood floor during the policy period, a question was raised as to whether LMI was entitled to remediation cost coverage for this contamination under the ELI Policy. 

LMI filed a declaratory judgment action and promptly moved for summary judgment.  Steadfast stated in opposition to the motion that it had obtained several documents suggesting that LMI and/or CCI was aware of the PCB contamination in the wood floor prior to the inception date of the ELI Policy, and thus it may be a Known Pollution Condition for which coverage was unavailable.  Steadfast argued, therefore, that at a minimum, it should be entitled to further discovery on the issue.  Steadfast, in fact, had been pursuing such additional discovery but was mired in several non-party discovery disputes at the time LMI filed for summary judgment.  LMI countered that any such discovery was irrelevant, since the ELI Policy defined the term Known Pollution Conditions as anything identified in the RSL Policy’s Scope of Work Endorsement, and that as such, anything not identified in the Scope of Work Endorsement was not a Known Pollution Condition.  In other words, because the Scope of Work Endorsement did not specifically identify PCB contamination in the wood floor of Building 116, it necessarily followed that this could not be a Known Pollution Condition for the purpose of the ELI Policy, regardless of when LMI first became aware of or discovered this condition.

The court disagreed with LMI’s reading of the two policies.  While the RSL Policy stated that only those conditions specifically identified could be considered Known Pollution Conditions for the purpose of the RSL Policy, the definition of Known Pollution Conditions in the ELI Policy contained no similar restriction.  In other words, an area of contamination could be considered a Known Pollution Condition for the purpose of the ELI Policy even if not specifically identified in the RSL Policy’s Scope of Work.  In any event, the ELI Policy’s insuring agreement made clear that coverage was unavailable for any pollution condition discovered outside of the policy period.  The court reasoned that LMI’s interpretation of the ELI Policy “that anything not listed as a known condition in the RSL Policy necessarily was discovered during the policy period – would collapse the two provisions of the ELI Policy [i.e., the discovery requirement and the known conditions prohibition] into one.”  Thus, the court denied LMI’s motion for summary judgment without prejudice, and permitted Steadfast additional time to take discovery into the known conditions issue.

New York Court Holds UST Sublimit Applicable to Underlying Loss

In its recent decision in Two Farms, Inc. v. Greenwich Ins. Co., 2014 U.S. Dist. LEXIS 1629 (S.D.N.Y. Jan. 7, 2014), the United States District Court for the Southern District of New York had occasion to consider the whether the phrase “underground storage tank(s) and associated piping” as used in a pollution liability policy was ambiguous.

Greenwich insured Two Farms under a Pollution and Remediation Legal Liability Policy with limits of liability of $5 million per pollution condition. The policy contained an exclusion applicable to claims “based upon or arising out of the existence of any underground storage tank(s) and associated piping.”  The exclusion, however, had an exception for tanks identified in an “Underground Storage Tank(s) and Associated Piping Schedule, if any.”  The Two Farms policy, in fact, contained such a schedule as an endorsement which identified the underground storage tank (“UST”) and piping at the insured’s facility.  Notably, the policy also contained an endorsement titled “Dedicated UST Sublimit Endorsement,” which set forth a sublimit of liability of $1 million applicable to loss or remediation costs applicable to “all Underground Storage Tanks and Associated Piping scheduled to [the] Policy.”

During the policy period, Greenwich discovered that thousands of gallons of gasoline had been discharged into the soils of its facility.  It was later determined that the source of the leak was a defective “O-Ring,” which is a component of a pump that drew gas from the insured UST.  The gas leaked into a containment sump, but ultimately was discharged directly into the ground.  The remediation costs associated with the leak were alleged to exceed $5 million.  Greenwich paid $1 million toward the loss, asserting that this was the maximum recovery permitted under the policy as a result of the UST sublimit. 

While Two Farms agreed that the phrase “underground storage tanks and associated piping” as used in the exclusion and exception to the exclusion was unambiguous, it contended that the phrase as used in the sublimit endorsement was ambiguous since it could have two meanings.  Specifically, Two Farms argued that

… the term "underground storage tanks and associated piping" can refer either to underground storage tanks and associated piping alone, or to underground storage tanks, associated piping, and other equipment that comprises the UST system. Two Farms therefore argues that the term "underground storage tanks and associated piping" is ambiguous as used in the UST Sublimit, and concludes that this ambiguity must be construed against Greenwich, the insurer.

Two Farms argued that because the sublimit endorsement was ambiguous, the $1 million sublimit set forth therein should not apply to the underlying loss.  Rather, it claimed entitlement to remediation cost coverage up to the policy’s $5 million limit of liability.

While the loss occurred in Maryland, the court applied New York law in light of the policy’s express New York choice of law provision.  The court agreed that under New York law regarding the phrase “arising out of,” the UST exclusion applied to the underlying loss since the discharge of gasoline would not have happened but for the existence of a UST and its associated piping.  As the court explained, “[t]he equipment that caused the Discharge would be entirely unnecessary if Two Farms did not have the underground storage tank and associated piping to which that equipment was attached.”  The court further agreed, however, that because the UST was scheduled in the Underground Storage Tank(s) and Associated Piping Schedule, the exception to the exclusion applied.   In so concluding, the court found no ambiguity in the phrase “underground storage tank and associated piping,” finding the phrase to have a “definite and precise meaning.”  As such, the court rejected Two Farms argument that this phrase could be ambiguous when used in the sublimit endorsement, explaining:

The term "underground storage tanks and associated piping" must be interpreted broadly in order to effectuate the parties' intent that Two Farms receive coverage for losses incurred because of the Discharge; namely, losses that result from defects in the UST system. This interpretation of the term "underground storage tanks and associated piping" is appropriately applied across provisions of the Policy because "a word used by the parties in one sense will be given the same meaning throughout the contract in the absence of countervailing reasons," and no countervailing reasons are apparent in this case.

Notably, the court found no indication that the parties intended the phrase “underground storage tanks and associated piping” to have different meanings in different sections of the policy.  It therefore concluded that Two Farm’s arguments concerning ambiguity unduly strained the policy language beyond its reasonable and ordinary meaning.  While the court found the language plain and unambiguous, it noted in passing that extrinsic evidence, including testimony of the insured’s broker, supported the conclusion that the sublimit was intended to apply to all USTs on the schedule.

Wisconsin Appellate Court Holds Manure Not a Pollutant

In its recent decision in Wilson Mutual Ins. Co. v. Falk, 2013 Wisc. App. LEXIS 1031 (Wis. App. Dec. 11, 2013), the Court of Appeals for Wisconsin had occasion to consider whether cow manure generated at a dairy farm constitutes a pollutant for the purpose of a pollution exclusion.

Wilson Mutual issued a farmowners policy to Jane and Robert Falks, insuring their dairy farm operations.  The policy’s liability part contained an exclusion applicable to “losses resulting from the "discharge, dispersal, seepage, migration, release, or escape of  'pollutants' into or upon land, water, or air" as well as for "any loss, cost, or expense arising out of any … claim or suit by or on behalf of any governmental authority relating to testing for, … cleaning up, removing, … or in any way responding to or assessing the effects of ‘pollutants.’” The term “pollutant” was defined in the policy as “any solid, liquid, gaseous … irritant or contaminant, including … waste. Waste includes materials to be recycled, reclaimed, or reconditioned, as well as disposed of.”

In early 2011, the Falks began using manure generated by their cattle for crop fertilizer.  Their fertilizer plan was prepared by an agronomist and approved by their local county’s land and water conservation division.  Several months later, however, the Wisconsin Department of Natural Resources notified the Falks that manure runoff from their farm contaminated a local aquifer and polluted their neighbors’ wells.  These neighbors asserted claims against the Falks, who in turn sought coverage under their policy.  Wilson Mutual disclaimed coverage for the claims on the basis of its policy’s pollution exclusion.  In the ensuing coverage litigation, the trial court granted summary judgment in Wilson Mutual’s favor, concluding that cow manure constitutes waste for the purpose of the exclusion, and that the exclusion, therefore, barred coverage for the underlying claims.

On appeal, Wisconsin’s Court of Appeals agreed that manure came within the plain terms of the policy definition of “pollutant,” since manure “is certainly gaseous, often liquid, solid in winter, and can be both an irritant and a contaminant.”  (Emphasis in original.)  This, however, did not end the court’s inquiry, as it noted that in Peace v. Northwestern Nat'l Ins. Co., 596 N.W.2d 429 (1999), Wisconsin’s Supreme Court articulated a standard requiring a more exacting analysis of what constitutes a “pollutant,” since “there is virtually no substance or chemical in existence that would not irritate or damage some person or property.”  The Peace court reasoned that “the reach of the pollution exclusion clause thus must be circumscribed by reasonableness, lest everyday incidents be characterized as pollution and the contractual promise of coverage be reduced to a dead letter.”  In other words, determining whether a substance qualifies as a pollutant for the purpose of the exclusion must be viewed in terms of the understanding of a “reasonable person in the position of the insured.”

Looking to the holdings in Peace and its progeny, the court noted diverging results as to what substances qualify as pollutants.  For instance, Wisconsin courts have held that carbon monoxide released indoors is not a pollutant, whereas lead paint chips are properly considered a pollutant.  Further, in a 2012 decision, the Wisconsin Supreme Court held that bat guano would reasonably be considered a pollutant by a homeowner.  With these decisions in mind, the court reasoned that a dairy farmer likely would not cow consider manure to be a pollutant, explaining:

Manure is a matter of perspective; while an average person may consider cow manure to be "waste," a farmer sees manure as liquid gold. Manure in normal, customary use by a farmer is not an irritant or a contaminant, it is a nutrient that feeds the farmer's fields that in turn feeds the cows so as to produce quality grade milk. Manure in the hands of a dairy farmer is not a "waste" product; it is a natural fertilizer. While bat guano is "waste" to a homeowner, and lead paint chips are universally understood by apartment building owners to be dangerous and pollutants, manure is beneficial to a dairy farmer. Manure, by act of nature, has always been universally present on dairy farms and, if utilized in normal farming operations, is not dangerous

In reaching its holding that manure is not a pollutant and that the exclusion was inapplicable, the court noted that Wilson Mutual acknowledged the value of manure to the Falks, since the policy insured several pieces of equipment used in the manure fertilizer process; namely, the farm’s manure tank, the manure pump, manure spreaders and two manure tankers.  The court observed that by taking premium for this risk, Wilson Mutual expressed an understanding that manure spreading was a part of the Falks’ operations.  As such, explained the court, Wilson Mutual “cannot now seriously contend that paying claims related to the Falks' manure spreading is ‘a risk it did not contemplate and for which it did not receive a premium.’”

Oklahoma Court Enforces Terms of Pollution Buy-Back

In its recent decision in Star Ins. Co. v. Bear Prods., Inc., 2013 U.S. Dist. LEXIS 148559 (E.D. Okl. Oct. 16, 2013), the United States District Court for the Eastern District of Oklahoma had occasion to consider the coverage afforded under a pollution buy-back endorsement.

Star Insurance Company insured Bear Products under a primary general liability policy as well as an umbrella liability policy.  Bear was named as a defendant in a class action lawsuit alleging personal injury and property damage resulting from exposure to “produced fluid waste,” described as waste fluids and solids generated as a result of oil and gas drilling operations.  Specifically, produced fluid waste is described to include “saltwater, sand, acid, oil-based drilling fluids, water-based drilling fluids, completion flowback fluid, frack flowback fluid, workover flowback fluid, rainwater gathered on drilling and productions sites, drilling cuttings, pit water, including frack, mud, circulation and reserve pits, and numerous other fluids and solid wastes generated during the exploration and completion of oil and gas wells.”  Bear Products was identified as having transported produced fluid waste to a disposal pit located in the vicinity of the plaintiff class.

Both the primary policy and umbrella policies issued by Star Insurance contained a total pollution exclusion.  The primary policy also contained an endorsement giving back limited pollution liability at designated well sites for bodily injury, property damage or environmental damage caused by a “pollution incident.” The endorsement set forth the following limitations on coverage:

This insurance applies to "bodily injury", "property damage", and "environmental damage" only if:

(1)       The "bodily injury", "property damage", or "environmental damage" are caused by a "pollution incident"

(a) on or from a "designated well site" in the "coverage territory", and

(b) that begins and ends within 72 hours of the incident; and

(c) that is accidental; and

(d) that is reported within 90 days of the incident

(2)       The "bodily injury", "property damage", or "environmental damage" first occurs during the policy period[.]

The court agreed that produced fluid waste was a pollutant for the purpose of the policies’ respective pollution exclusions.  Bear Products nevertheless contended that at the very least, coverage was available under the primary policy’s pollution buy-back endorsement.  The court disagreed.  Looking to the allegations of the complaint, the court observed that the conditions necessary to trigger the pollution coverage under the buy-back were not satisfied.  Notably, the waste was alleged to have been generated and disposed of prior to the policy period, the pollution condition lasted more than 72 hours, and the pollution condition was not accidentally generated.  Bear Products argued that if strictly enforced, the buy-back would be rendered illusory, since the majority of pollution incidents for which it could be liable would not satisfy these conditions precedent to coverage.  The court rejected this argument, explaining:

…  Bear is a corporate business. It bargained for an exception to the pollution exclusion. Bear is entitled only to the coverage for which it negotiated and paid. Bear argues that read literally, the policies provide virtually no coverage for risks inherent to its business. In fact, the policies do provide coverage for some risks inherent to Bear's business. For example, the policies cover liability as a result of an accidental spill of waste (a "pollution incident") or an accidental collision of one of Bear's trucks with another vehicle, object or person. Though it is unfortunate that the policies do not cover liability for pollution as alleged in the Underlying Complaint, the court may not rewrite the policies.

Second Circuit Holds Pollution Liability Policy Not Triggered

In its recent decision in Colonial Oil Indus. v. Indian Harbor Ins. Co., 2013 U.S. App. LEXIS 12946 (2d Cir. June 25, 2013), the United States Court of Appeals for the Second Circuit, applying New York law, had occasion to consider the scope of coverage afforded under a pollution liability insurance policy.

Indian Harbor insured Colonial Oil under a Pollution and Remediation Legal Liability Policy, insuring pollution conditions on, at, under or migrating from any covered location.  The policy defined “pollution condition” as “[t]he discharge, dispersal, release, seepage, migration, or escape of POLLUTANTS into or upon land, or structures thereupon, the atmosphere, or any watercourse or body of water.” 

At issue in the litigation was Colonial Oil’s right to coverage for having delivered PCB contaminated oil to a customer.  The oil was properly deposited into the customer’s storage tank, as intended.  The presence of PCB in the oil, however, required Colonial Oil to incur costs to decontaminate and clean its customer’s tank and other equipment.  Colonial Oil argued that it was entitled to coverage under its pollution liability for these cleanup costs.  Indian Harbor, denied coverage for these costs on the basis that the policy only insured against releases of pollutants into the environment and that the transfer of oil from a tanker truck to a customer’s tank, as intended, is not a covered discharge, dispersal, release, seepage, migration or escape of a pollutant.  The United States District Court for the Southern District of New York agreed and granted Indian Harbor’s motion to dismiss.

On appeal, the Second Circuit affirmed the lower court’s ruling, observing that under New York law as set forth in numerous decisions, primarily involving interpretation of the pollution exclusion, the terms used in the policy’s definition of “pollution condition” such as discharge, dispersal, etc. are considered terms of art under environmental law relating to disposal or containment of hazardous waste.   These cases, explained the court, make clear that:

… the "reasonable expectations of a businessperson" viewing the contested Policy language would be that it is intended to provide coverage for environmental harm resulting from the disposal or containment of hazardous waste. This case-which merely involves the unwitting introduction and transfer of polluted oil into containers otherwise meant to hold that oil-does not fall within those parameters.

As such, the court agreed that Colonial Oil’s transfer of adulterated oil into its customer’s tank did not create a pollution condition for which Indian Harbor’s policy was triggered.

Alabama Supreme Court Holds PRP Letter Triggers Duty to Defend

In its recent decision in Travelers Cas. & Sur. Co. v. Ala. Gas Corp., 2012 Ala. LEXIS 174 (Ala. Dec. 28, 2012), the Supreme Court of Alabama addressed for the first time whether a PRP letter from the EPA qualifies as a “suit” for the purpose of triggering a duty to defend under a general liability policy.

The issue was certified by the United States District Court for the Northern District of Alabama, which presented the Supreme Court of Alabama with the following question:

Under Alabama law, is a 'Potentially Responsible Party' ('PRP') letter from the Environmental Protection Agency ('EPA'), in accordance with the Comprehensive Environmental Response Compensation and Liability Act ('CERCLA') provisions, sufficient to satisfy the 'suit' requirement under a liability policy of insurance?

The insured sought coverage under some forty years of general liability coverage issued during the 1940s through the 1980s.  The policies required the insurers to defend any suit alleging “injury, death, damage, or destruction and seeking damages on account thereof, even if such suit is groundless, false, or fraudulent.”  In October 2008, the insured received an informational request from the EPA.  The insurers took the position that the request for information did not rise to the level of a claim or suit triggering coverage under the policies.  In June 2009, after having informally identified the insured as the primary PRP, the EPA issued a formal PRP letter to the insured along with a draft Administrative Order on Consent.  The insured demanded a defense in connection with the PRP letter, which was denied on the basis that the letter did not qualify as a suit that would trigger a defense obligation.

Observing that the term “suit” was not defined in the policies, the court reasoned that the term must be defined “according to the meaning a person of ordinary intelligence reasonably would afford it in regard to the insurance contract at issue and the statutory and regulatory scheme that exists for the enforcement of applicable environmental laws, including the imposition of liability under those laws.”   Looking to case law throughout the country as well as expert commentary, the court sided with what it viewed to be the majority rule that a PRP letter does constitute a suit, citing to decisions such as those by highest courts of Michigan, Massachusetts and Nebraska in Millers Mutual Insurance Co. v. Bronson Plating Co., 519 N.W.2d 864 (1994); Hazen Paper Co. v. United States Fidelity & Guaranty Co., 555 N.E.2d 576 (1990) and Dutton-Lainson Co. v. Continental Ins. Co., 778 N.W.2d 433 (2010).

Central to the court’s holding was that in light of the EPA’s broad enforcement powers and “[g]iven the severe penalties for failure to cooperate and other enforcement tools available to the EPA, a decision by the EPA to designate an insured as a PRP cannot on any practical level be understood as anything less that the initiation of a ‘legal action’ constituting a ‘suit’ within the contemplation of the insurance contract at issue.”  Thus, reasoned the court, the term “suit” should not be limited only to matters that proceed in court, but instead should encompass broader legal actions and proceedings, such as regulatory proceedings under CERCLA.

Michigan Court Holds Tank Repair Costs Not Covered Under UST Policy

In its recent decision in H & M Petro Mart v. Zurich Am. Ins. Co., 2012 U.S. Dist. LEXIS 163205 (E.D.Mich. Nov, 15, 2012), the United States District Court for the Eastern District of Michigan had occasion to consider the scope of an insurer’s coverage obligations under a storage tank liability policy.

Zurich insured H&M Petro Mart under a Storage Tanks System Third Party Liability and Cleanup Policy, providing environmental cleanup coverage for releases of product from four insured underground storage tanks.  The policy defined “tank” to include “any connected piping, ancillary equipment and containment system that is on, within, or under a 'scheduled location.'”  Further, the policy defined “cleanup costs” as necessary costs related to the “investigation, removal, remediation, neutralization or immobilization of contaminated soil, surface water, groundwater, or other contamination.”  Notably, the policy contained an exclusion applicable to:

L.   any costs for the reconstruction, repair, removal, maintenance, replacement, upgrading, or rebuilding of any "scheduled storage tank system", personal property, fixtures, buildings, or any other improvements and any site enhancement or routine maintenance on, within, or under the "schedule location(s).

H&M reported a release to Zurich in 2009, and Zurich subsequently paid in excess of $190,000 in costs identified as “cleanup costs.”  Zurich, however, disclaimed coverage for certain costs submitted by H&M that related to reinstallation and/or reconstruction of gas pumps, such as installation of new product lines, electrical wire and conduits, reconstruction of a sewer system and canopy drain, installation of dispenser islands and bumper guards, and re-installation and calibration of dispensers.  H&M also sought coverage for costs associated with pouring of 5,800 square feet of concrete on the ground above where the new tanks had been installed.  Zurich determined that such costs were for site enhancement and not properly categorized as remediation costs.

H&M argued in a subsequent declaratory judgment action that the denied costs were integral to the remediation of its site and thus should qualify as “cleanup costs.”  Specifically, H&M argued that in order to effectuate the environmental cleanup required by the state, H&M was required to rip up the concrete at its gas station and remove its tanks, in order to gain access to the contaminated soils.  As such, argued H&M, these items were damaged by the release, and their replacement costs should come within the policy’s coverage.  H&M also argued that it was required to replace certain portions of its tanks and repour the concrete in order to comply with applicable regulations.

The court agreed that while it may have been necessary to remove portions of the tanks and concrete in order to effectuate the remediation, this did not mean that the costs of replacing such items came within the policy’s coverage.   On the contrary, the policy specifically excluded coverage for such items as indicated in exclusion L, which explicitly barred coverage for tank repairs or reconstruction.  The court drew a distinction between costs necessary to effectuate the remediation and costs covered under the policy:

Zurich assumed the costs for cleaning up the soil and groundwater to bring its quality up to standards required by governmental regulations. Zurich satisfied this obligation when MDEQ issued a "closed" designation  to the site. It appears as if the services invoiced may be "necessary" in remediating the contaminated area because excavation of the site was required to treat the surrounding affected area. Inevitably, items on the surface of the location required removal in order to remediate the contamination. Although they may be necessary in order to effectuate remediation, these costs are explicitly excluded in Section IV.L of the Policy.

The court held similarly with respect to repouring concrete at H&M’s station.  The court agreed that while such work was necessary to restore the site to its original condition, Zurich’s policy did not afford coverage for such work.  Rather, Zurich’s coverage obligations were limited to remediating any environmental contamination.   As the court explained, the policy “unambiguously excluded coverage for costs associated with restoring the entire premises back to its original condition.”

Pennsylvania Court Holds Pollution Exclusion Applies to Pig Farm Odor Claim

In its recent decision in Travelers Property Casualty Company of America v. Chubb Custom Insurance Co., 2012 U.S. Dist. LEXIS 44756 (E.D. Pa. Mar. 30, 2012), the United States District Court for the Eastern District of Pennsylvania, applying Pennsylvania law, had occasion to consider whether noxious odor emanating from a pig farm constituted a pollutant for the purpose of a total pollution exclusion.

The insured operated commercial pig farms in several states, including a facility in Indiana that contained some 2,800 sows and their babies.  The facility collected the pig excrement into a large, cement pit that eventually drained through a drag line.  The drag line, in turn, deposited the waste onto nearby fields for use as fertilizer.  The insured and other entities were sued by several neighbors who alleged that the facility produced “harmful and ill-smelling odors, hazardous substances and contaminated wastewater” that resulted in personal injury and property damage.  Among other things, the complaint alleged that the “offensive and noxious odors” impaired plaintiffs’ use and enjoyment of their properties and caused “sudden onset” ailments, including nausea, vomiting, headaches, respiratory problems, irritation and aggravation of existing medical conditions.

Travelers and Zurich, which issued successive years of primary general liability coverage, denied coverage based on their policies’ respective total pollution exclusions, which in pertinent part applied to the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” After engaging in a lengthy choice of law analysis in which the court determined that the policies were governed by Pennsylvania rather than Indiana law, the court addressed the issue of whether noxious odors fell within the policies’ definitions of “pollutants,” defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” 

The court conceded that the issue of whether odors emitted from a large livestock facility are a pollutant was a matter of first impression under Pennsylvania law.  The court therefore relied on several Pennsylvania cases applying standard dictionary definitions to the terms used in the definition of “pollutant.”  Thus, for example, contaminant is generally defined as  “something that renders another thing impure” and waste is generally defined as “superfluous material produced during or left over from a manufacturing process or industrial operation.”  The court also looked to Pennsylvania cases holding that fumes can qualify as pollutants for the purpose of pollution exclusions.  See, e.g., Madison Constr. Co. v. Harleysville Mut. Ins. Co., 735 A.2d 100 (Pa. 1999) (fumes from cement curing agent); Matcon Diamond, Inc. v. Penn National Ins. Co., 815 A.2d 1109 (Pa. Super. Ct. 2003) (carbon monoxide fumes).  Relying on these definitions and cases, the court determined that:

… noxious odors produced by pig excrement (or waste) that cause bodily injury and property damage appear to fit squarely within the definition of pollutant under the policies.  The fact that pig waste is spread over fields as fertilizer is of no moment, as “waste” includes materials left over from a production operation, and the policies’ definition of pollutant expressly includes waste that is to be reused.

In reaching its holding, the court considered the insured’s argument that “simple odors cannot be pollutants.”  Specifically, the insured argued that “because odors can be unpleasant or sweet, harmful or innocuous, the allegation of foul odors is too ambiguous to be construed as a pollutant barring coverage.”  The court, however, rejected such a bright line rule.  Instead, the court held that it is the nature of the alleged odors, in relation to the alleged harm, that determines whether it is a pollutant.  Thus, explained the court, noxious odors emanating from a pig farm that allegedly resulted in harms beyond mere nuisance, but actual bodily injury (i.e., nausea, vomiting, breathing difficulties, etc.), unambiguously fell within the definition of “pollutant.”  The court also rejected the insured’s argument that the exclusion did not apply because manure odors are commonplace in rural areas. 

New York Court Addresses Impact of Allowing Insured to Default

In its recent decision in Sunnyside Dev. Co., LLC v. Chartis Specialty Ins. Co., 2012 U.S. Dist. LEXIS 9392 (S.D.N.Y. Jan. 26, 2012), the United States District Court for the Southern District of New York demonstrated the consequences that an insurer faces when allowing an insured to default.

Chartis insured Opsys under a pollution legal liability policy that provided first and third party liability coverage for a property that Opsys leased from Sunnyside in Fremont, California.  Opsys used the premises for research and development in the organic light emitting diode industry.  During the policy term, Opsys filed for Chapter 7 bankruptcy, which triggered a regulatory inspection of Opsys’ facility, which in turn resulted in a Notice of Violation based on “a condition dangerous to human health, property, and the environment by abandoning hazardous materials and hazardous waste.”  As a result, Sunnyside was advised that the property could not be re-occupied until a Closure Order was issued.

Chartis paid certain costs under the policy relating to pollution caused as a result of leaking or ruptured drums within the facility.  Sunnyside nevertheless received permission from the bankruptcy court to commence suit against Opsys, to obtain benefits under the Chartis policy, primarily relating to lost rent resulting from its inability to lease the facility while undergoing remediation.  Sunnyside thereafter commenced suit against Opsys in California, and advised Chartis that it intended to take a default against Opsys if the action was not defended.  For reasons not clear, Chartis did not provide a defense, and Sunnyside eventually obtained a default judgment against Opsys for the $1 million limit of the Chartis policy.

After determining that Chartis received proper notice of the pending default, and had an opportunity to defend the suit, and even had an opportunity to attempt to vacate the default after it had been entered, the court considered the effect of Chartis’ inaction.  Chartis argued that Sunnyside failed to demonstrate that its damages were caused as a result of a “pollution condition,” a term defined in pertinent part as a “leak” or a “release,” but instead were caused as a result of an abandonment or the mere presence of pollutants.   While court agreed that Chartis could raise defenses to its policy’s coverage, since coverage was not technically at issue in Sunnyside’s suit against Opsys, the court nevertheless held that Chartis could not relitigate facts that were decided in Sunnyside’s suit against Opsys.  Thus, the California court’s judgment that there was property damage at the premises resulting from leaking or ruptured drums, and that there was a release of hazardous materials, even if inaccurate, was nevertheless binding on Chartis for the purpose of determining coverage.  As the court explained, “if Chartis wanted to litigate the proximate cause of Sunnyside's damages, it should have intervened in the California Action or moved to set aside the Default Judgment.”

South Dakota Supreme Court Addresses Sudden and Accidental Pollution Exclusion Language

In its recent decision in Demaray v. De Smet Farm Mut. Ins. Co., 2011 S.D. LEXIS 98 (S.Dak. July 20, 2011), the South Dakota Supreme Court addressed whether the phrase “sudden and accidental,” as used in a pollution exclusion, is ambiguous.

The insureds, who ran a cattle operation, were sued for alleged intermittent, repeated and continuing discharge of animal and other wastes and process waste water into lakes and streams on the claimant’s property.  The insureds sought coverage under the liability coverage of a policy issued by De Smet Fam Mutual Insurance Company.  De Smet, in turn, denied coverage on the basis of the policy’s pollution exclusion applicable to the “the discharge, dispersal, release, or the escape of pollutants into or upon land, water or air.”  The exclusion, however, contained an exception for “bodily injury or property damage arising out of the sudden and accidental discharge, dispersal, release or escape into or upon land . . . of pollutants used in or intended for use in normal and usual farming activities[.]”  The insureds argued that the exception applies because the pollution alleged in the underlying complaint failed to allege that the pollution was the result of intentional conduct.

The court acknowledged that matter was one of first impression as no South Dakota court previously addressed the phrase “sudden and accidental” in the context of a pollution exclusion.  The court therefore looked to the two lines of “sudden and accidental” case law in other jurisdictions.  The first line of cases holds that the phrase “sudden and accidental” is ambiguous since the word sudden can have several meanings, including accidental and abrupt.  In light of this ambiguity, these courts construe the phrase in the insured’s favor to mean accidental, and as such, the phrase “sudden and accidental” means “unexpected or unintended.”  By contrast, the other line of cases holds that the phrase is unambiguous and that the term “sudden” refers solely to a temporal element.  The court agreed with the latter line of cases.

Thus, agreeing that the phrase “sudden and accidental” has a temporal element, the court looked to the allegations in the underlying complaint to determine whether any of the alleged discharges could be describe as “abrupt or immediate and unexpected or unintended.”  The court held that no such conduct was alleged.  Rather, the underlying complaint alleged intermittent and continuous discharges which the court explained was not “sudden and accidental”:

No language in the Alvine complaint arguably supported a cause of action for a "sudden and accidental" discharge of pollutants. "Intermittently" cannot be construed to mean abrupt or immediate. The complaint clearly made claims against Demaray and Hagemann for "past and continuing" and "repeated" discharges that "will continue." There is no immediacy or abruptness with a discharge that is intermittent, repeated, and likely to continue.

The court further rejected the insureds’ attempt to point to single “sudden and accidental” events within the larger course of systemic conduct, such as a sudden and violent rainstorm that caused waste to be discharged onto the claimant’s property.  The court explained that it would not engage in “microanalyzing” the insureds’ long-term routine of waste disposal in order to find one single, discrete instance of a “sudden and accidental” discharge. 

Michigan Court Holds No Coverage Under Successive UST Policies

In its recent decision Webb Operating Co. v. Zurich American Ins. Co., 2011 U.S. Dist. LEXIS 73675 (E.D.Mich. July 8, 2011), the United States District Court for the Eastern District of Michigan had occasion to consider whether an insured under a series of consecutive claims made and reported underground storage tank policies was entitled to coverage for remediation costs where it failed to report the “claim” during the proper policy period.

The policies at issue insured a gas station operated by the insured for cleanup costs as required by governmental authorities resulting from releases from covered underground storage tanks, but only to the extent discovered during the policy period and only to the extent the “claim” was reported to Zurich during the policy period.  The relevant policy defined “claim” as notice given by the insured, during the “policy period” seeking payment of “cleanup costs” required by a “governmental authority.”  The preamble to the policies expressly identified the policies as “claims made and reported” policies.

During the period the insured’s 2005-2006 policy was in effect, one of its covered underground storage tanks failed a tank tightness test.  The insured subsequently decided to close its tank, but chose not to report the matter to Zurich at the time because the costs associated with the tank closure barely exceeded the policy’s deductible.  The insured, however, continued to incur monitoring and remediation costs over the next three years, ultimately leading to its decision to give notice to Zurich when its policy for the 2009-2010 period was in effect.  The insured argued that coverage should be afforded under the 05-06 policy, or at the very least, under the 09-10 policy, since that was when it gave notice of claim.  Among other things, the insured argued that Zurich could not disclaim coverage under the 05-06 policy unless it could show it had been prejudiced as a result of the insured’s delayed notice.

The court rejected the insured’s prejudice argument, explaining that prejudice is a consideration only with respect to occurrence-based policies, not claims made and reported policies.   Because the Zurich policies were claims made and reported policies, wrote the court, Zurich was not required to show that it was prejudiced under the 05-06 policy in order to disclaim coverage.  Rather, Zurich only needed to show that the insured failed to comply with the policy’s condition precedent to coverage; namely, giving notice of “claim” during the same policy period in which the release was first discovered.  The court concluded for the same reason that coverage was unavailable under the 09-10 policy since the release was not first discovered during the time that policy was in effect.